Autos Weekly: Toyota's Return to Arrogance?

This week brought news of an impending IPO for America's No. 4 automaker (that'd be Tesla Motors), a Ford (NYSE: F  ) friendly shake-up in the J.D. Power quality rankings, signs that the auto industry's heaviest hitters were continuing to see signs of economic recovery, and some emerging concerns for those investing in the electric-car revolution.

Here are some of the stories we're following that you might have missed.

Toyota resumes attempts at world domination
Toyota (NYSE: TM  ) , like nearly every other big company on the planet, put most of its expansion plans on hold in the wake of the global financial crisis. Not only were plans for new factories in several countries shelved, but also the company was forced to reduce capacity, cutting shifts and closing a plant (the former NUMMI plant in Northern California, now sort-of sold to Tesla Motors) for the first time ever.

While Toyota didn't get forced into bankruptcy protection like some of its competitors, it has certainly had its share of troubles over the past couple of years. But apparently, management feels that things are looking up: Construction of a new assembly plant in Mississippi, on hold for a year and a half, will proceed now. The plant was originally scheduled to become the first North American plant making Toyota's popular Prius hybrid, but Toyota now says that the plant will produce its compact Corolla model instead. Production is expected to begin in the second half of 2011.

Work has also resumed recently on new plants in Brazil and China, further evidence of Toyota's faith in the ongoing global recovery.

GM's recovery hits high gear
Toyota's renewed focus on expansion is a good sign, economically speaking, but it isn't the only one: General Motors announced this week that nine of its 11 assembly plants will skip their traditional summer shutdowns and instead continue production through July.

Summer plant shutdowns -- a traditional time for worker vacations, and for manufacturers to retool for the new model year -- are a standard U.S. auto industry practice, a longtime part of the automakers' contracts with the United Auto Workers. Not this year, though -- GM has said that it will bring in temporary workers to provide vacation coverage, keeping plants running to meet high demand for several of its vehicles.

GM's sales have been especially strong lately, but it isn't the only automaker adjusting production to meet rising demand: Although cross-town competitor Ford isn't expected to abandon summer shutdowns, the Dearborn, Mich., automaker has announced plans to increase production by 42% in the second quarter and 16% in the third quarter.

Chrysler expects to conduct its summer plant shutdowns as usual.

At least we won't run short of batteries
Electric cars are certainly emerging as the Next Big Thing: Toyota and Ford's hybrids are selling well, Tesla's moving toward the mass market, and Nissan's upcoming all-electric Leaf is receiving great press and piles of pre-orders.

About 14,000 people have already put down $99 deposits to hold their place in line for the Leaf, due by the end of this year. Nissan eventually expects to produce 150,000 of the vehicles annually at its Tennessee plant. And Ford recently said that electric vehicles could represent as much as 25% of its total sales by 2020.

That's a lot of electric cars. But even with optimistic projections, we may be headed for a glut of electric car batteries. Billions are being invested in the emerging business of lithium-ion vehicle batteries, with several huge projects underway in the U.S. and abroad. The names involved range from heavy-hitter auto suppliers like Johnson Controls (NYSE: JCI  ) to battery heavyweights like LG Chem and China's BYD, to smaller companies like A123 Systems (Nasdaq: AONE  ) .

But some of those investments might be premature: By some estimates, battery production could outpace demand by more than a million units a year within five years. Consolidation and shake-outs may be inevitable, something that investors in companies like A123 should consider carefully.

Those looking to ride the EV boom might be better off investing in the longtime auto suppliers that have made significant EV-related investments, such as Johnson Controls and Lear Corp. (NYSE: LEA  ) , which has invested heavily in electric-car component manufacturing. Or you could consider Tesla's upcoming IPO -- but if you do, tread carefully.

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Fool contributor John Rosevear owns shares of Ford. Ford is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (6)

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  • Report this Comment On June 18, 2010, at 10:32 PM, baldheadeddork wrote:

    Nice recap John. I still think Toyota is going to have a lot of excess capacity in the US for the foreseeable future, and I don't think they've found bottom on their market share yet. It would have been a better move to kill the Tundra and convert the Fort Worth plant to Corolla production, but they didn't ask me so...

    The big story that caught my eye this week was GM abandoning (or finally facing reality, your pick) its attempt to get help for Opel from the European governments. GM is going to find financing for Opel on its own, which isn't going to come cheap or small. The European market is looking at a very bad year and Opel is in particularly rough shape because of uncertainty about its future for the last 18 months.

    I think GM has to save its presence in Europe if it's going to remain a global power, but in the short term this isn't going to help its plans for an IPO later this year.

    The auto strikes against Toyota and Honda in China were covered like a novelty story, but this isn't going to be the last we hear about labor unrest in China. What it evolves into is anyone's guess, but I wouldn't bet on the outcome being another decade of business as usual.

  • Report this Comment On June 19, 2010, at 12:03 PM, Bytefield wrote:

    I think you greatly underestimate the size of the electric vehicle market over the next few years.

    14,000 Nissan Leafs (Leaves?) have been reserved, before most of these customers have even seen the car in person. That tells you something. The small number of Chevy Volts produced this year will be snapped up. Unlike Nissan, which has a direct-to-consumer reservation process, it appears GM dealers will charge whatever the market will bear.

    There is enormous pent-up demand for electric cars. The GM EV1 was practical and loved by owners fifteen years ago, before GM crushed them all. With today's lithium-ion batteries, EVs are even more practical and affordable.

    Now add another factor: BP. How many consumers, given the choice to avoid petroleum consumption entirely for their daily commute, will jump at the chance? Nissan thinks 150,000 per year for their model alone. I think that's conservative, especially if there's another oil price shock.

    The market for electric vehicles will be far larger than people expect. According to a recent survey, 60% of Chinese would consider an EV. Once people experience the quiet and smooth acceleration of an EV, they want one. They'll be the iPad of transportation. And other automakers, seeing those Leaves flying out of the dealerships, will pile on.

    If 10-15% of 2013 vehicle sales in the US are EVs or PHEVs, that's more than a million vehicles. If those vehicles use a 24kWh battery pack like the Leaf, that's 24 gigawatt-hours of batteries.

    A123 Systems expects to double annual production to 360 megawatt-hours this year. That's only enough for 15,000 vehicles. They plan to double capacity again to 760MWh by the end of 2011. But since 40% of A123's production is for grid and consumer applications, they could at best supply a few percent of a million-car market.

    Can other battery manufacturers supply the rest? No way, because the US isn't the only market. LG Chem is committed to the Volt, and probably Korean automakers. BYD will have its plate full with the Asian market. And most other suppliers are tiny compared even to A123.

    So, with respect, the idea there could be a battery GLUT is absurd. Eventually they will become a commodity, but over the next 3-5 years, lithium-ion batteries will be a severe bottleneck for the exploding EV market. Which is why battery suppliers are such a bargain now for investors.

  • Report this Comment On June 19, 2010, at 4:22 PM, BobMichigan wrote:

    Anytime I see someone mention the EV1 as a success I know I am dealing with someone with no grip on reality.

    A car that cost $50k to build, leased for under $30k and under 20,000 mile battery life was just a money pit. The mistake was not crushing the EV's, but not having a plan to improve on that and move on to a practical vehicle.

    Of course the customers loved them, they didn't have to pay for them!

  • Report this Comment On June 19, 2010, at 7:11 PM, Bytefield wrote:

    I never said the EV1 was a success, I said it was practical. It had sufficient performance and range to be a vehicle people wanted.

    GM could have sold all they could make, then gradually brought the price down and made a profit as technology and experience improved. That's what Toyota did with the Prius.

    As for a 20K mile battery life, that was only true for the original lead-acid batteries, not the NiMH successor.

  • Report this Comment On June 19, 2010, at 7:55 PM, TMFMarlowe wrote:

    @Bytefield... I'd be more convinced of the Leaf's true impending popularity if those deposits were bigger than $99.

    Also, nobody really knows how much pent-up demand there is, because almost nobody has actually lived with an EV, and nobody knows how the mass market will react to these first models. There's certainly a lot of interest, but being interested and ponying up $30k for a brand-new technology are two different things.

    @baldheadeddork, I don't think the China thing is a novelty. I think it's a big, big deal, and the strikers' focus on Japanese-owned companies (for the most part) is an interesting wrinkle. Effects will depend, like everything in China, on the government's ultimate response. I don't think they've figured out what to do yet.

    Thanks for reading.

    John Rosevear

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